9/17/2009 @ 6:40PM

Critical 401(k) Deadline Looms For Small Businesses

Small businesses looking for shelter from the tax man might want to consider setting up a Safe Harbor 401(k) plan. But they have to move fast.

A Safe Harbor 401(k) enables small-business owners to make the maximum contribution of $16,500 in the current tax year without the additional administrative hassles that come in the form of “non-discrimination testing” by the IRS. Safe Harbor 401(k) regulations ensure that plans serve all employees, not just owners and highly paid lieutenants.

To qualify, owners have to match employee contributions in accordance with the safe harbor provisions. And they have to set up their plans before the government-mandated Oct. 1 deadline.

Plan-administration fees typically range from $1,000 and $2,000 per year for a small business. Think that’s too expensive? First, consider the tax savings.

Any business with less than 100 employees that is launching its first 401(k) plan qualifies for up to a $500 tax credit for each of the first three years of their plan. Business owners need only to have one participating employee, not including the owner, who earned less than $110,000 in 2008. Owners who match their employees’ contributions can also deduct that amount as a business expense.

Better yet, owners get a personal tax break, too. An owner in the 28% bracket making the maximum $16,500 contribution to his company’s plan would save $4,620–two to four times what the plan cost to set up.

As for that Oct. 1 deadline, plan providers typically need 10 days to process the paperwork–meaning that a more realistic deadline is early next week. The clock is ticking.

Stuart Robertson is general manager of ShareBuilder Advisors, LLC that operates ShareBuilder401k, a subsidiary of ING DIRECT. He can be reached at (206) 805-0377or srobertson@ingdirect.com.